In its 320-year history the Lloyd’s market has seen many disasters, from ships lost at sea to earthquakes, hurricanes and manmade catastrophes, causing widespread loss of life and destruction.
But nothing could prepare the industry for the events of September 11 when the world watched in horror as two planes crashed into New York’s Twin Towers, another into the Pentagon in Washington and a fourth in a field in Pennsylvania.
The horrific loss of life and destruction at the World Trade Center, where both towers collapsed shortly after the impact from the planes, dramatically scarred the Manhattan skyline and will forever remain etched in people’s minds.
9/11 was also a personal and professional tragedy for many in the industry who lost colleagues and loved ones. Brokers Marsh and Aon had offices in the towers, both companies feeling the pain of the attacks acutely.
Through an online memorial, Marsh remembers the 295 colleagues and 63 consultants it lost on 9/11, while Aon remembers the 176 colleagues it lost through a legacy website and the Aon Memorial Education Fund. The fund was established in 2002 to provide post-secondary educational financial assistance to the dependent children of Aon employees killed.
“There was a tremendous amount of unsettled feeling across the whole global financial system, underpinned by the high emotion caused by the tragic loss of so many people,” says Julian James, CEO of Lockton International, who was Lloyd’s Director of Worldwide Markets at the time of the attacks. “The insurance industry had never had to cope with an event that touched it so personally.”
Lessons from 9/11
As the market got to work to process a steady stream of claims amidst the uncertainty it became clear how significant an insurance loss the market was dealing with. 9/11 was Lloyd’s largest-ever single loss and it impacted many different classes of business.
Prior to 9/11 it had not been envisaged that classes of insurance such as aviation and fine art could suffer major claims at the same time as property and casualty lines. These once unthinkable correlations were among the lessons learned from the attacks.
Another major lesson was the necessity of contract certainty in the industry. It became clear that a dispute over whether the destruction of the Twin Towers had been one or two separate terrorism events would not have occurred had final policies been in place ahead of the attacks.
“To any outsider, it must seem highly unusual that this single agreement should not be in place,” said Lloyd’s Chairman Lord Levene, speaking in 2005. “The insurance industry owes it to its customers as well as to itself to ensure that cover is fully agreed and clearly documented right from the start.”
The market tackled the culture of ‘deal now, detail later’ head on in the years after 9/11 and reached an important milestone in January 2007 when it was reported that 90% of contracts in the subscription market and 88% of contracts in the non-subscription market had achieved certainty.
“This is a major achievement by the UK insurance industry,” said John Tiner, then CEO of the FSA. “Through their concerted hard work they have addressed an issue here in the UK that affects insurance globally.”
Standalone terrorism market
An altered view of terrorism risk following 9/11 led to the birth of a new standalone insurance market within Lloyd’s. After the attacks, terrorism began to be excluded from traditional all-risks property policies and even specialist underwriters struggled to write the risks back in.
“The political risk market was in the best position to provide capacity relatively quickly for the broader geographic locations,” says Simon Low, Head of Political Risks and Crisis Management at Canopius.
“The market has matured and continues to expand by capacity, insurable perils and geographic locations,” he adds. “There are now very few risks in the world where we are unable to provide the level of terrorism insurance required.”
Today the terrorism market in Lloyd’s is bigger than the political risk market that it grew out of, with billions of pounds’ worth of capacity. The market has also grown in sophistication with dedicated bespoke wordings where they are required alongside an otherwise standard product written on standard market forms.
The industry has also become more comfortable using loss models to manage terrorism risk. “Insurers are managing accumulations using realistic scenarios and event-specific footprints to monitor exposure across multiple lines of business,” says Peter Ulrich, Senior Vice President of Emerging Risk Solutions at catastrophe modelling firm RMS.
Government backstops – in particular TRIA (Terrorism Risk Insurance Act), now TRIPRA (the Terrorism Risk Insurance Program Reauthorization Act of 2007), in the US – were an essential part of ensuring terrorism insurance was available following 9/11, when commercial reinsurance capacity was hard to find.
Today things have moved on. “There’s an argument to say the vast majority of risks can be taken by the private market,” says Low. “Now the market has had ten years to bed down and the political will is wavering in some sectors of the US government, it will be an interesting debate the next time TRIPRA comes up for renewal to see if it continues at the same level or at all.
“For other pools around the world there hasn’t been the same interest in removing it,” he adds. “The private market is regularly providing competition to government schemes, the more sophisticated risk managers are looking at wrap and difference in conditions covers with pricing and financial security providing important considerations in the purchase.”
Assessing the risk
The political risk landscape in the decade since 9/11 has also changed with wars in Iraq and Afghanistan, the Arab Spring rebellions this year and the recent announcement of the death of Osama bin Laden. There have been terrorism attacks around the world, including Bali, London, Madrid and Mumbai.
Whether we will see another terrorism attack on the scale of 9/11 in our lifetime is uncertain, but the threat levels remain elevated in many countries. Terrorism experts are quick to remind that 9/11 took seven years of planning to carry out. “The ability of the al Qaeda group to carry out a large independently focused loss hasn’t really diminished,” says Low.
A report from RMS supports this view, concluding that in the last decade the global terrorism threat has become more diverse and more dispersed, but no less deadly. While the Middle East and South Asia are still at the epicentre of the threat, terrorist attacks extend far beyond these areas.
